1. DIEES PhD Candidate Seminar Series Yiannis Kountouris, 24/3/20091 Assessing the economic viability of alternative water resources in water scarce regions: The roles of economic valuation, cost–benefit analysis and discounting Ekin Birol 1, Phoebe Koundouri 2 * and Yiannis Kountouris 3 1 International Food Policy Research Institute 2033 K Street, NW Washington, DC 20006-1002, USA. Email: E.Birol@cgiar.orgE.Birol@cgiar.org 2 Department of International and European Economic Studies, Athens University of Economics and Business, Patision 76, 104 34, Greece. Email: pkoundouri@aueb.gr pkoundouri@aueb.gr 3 Department of International and European Economic Studies, Athens University of Economics and Business, Patision 76, 104 34, Greece. Email: ykountouris@aueb.gr ykountouris@aueb.gr *Corresponding Author

2. DIEES PhD Candidate Seminar Series Yiannis Kountouris, 24/3/20092 Purpose Illustrate a methodology for estimating the total economic value derived from environmental interventions Derive the Total Economic Value (TEV) of an environmental good Explicitly recognize the long term nature of the environmental intervention and account for it in CBA Examine the efficiency of using alternative water resources in a water scarce region –Evaluate the economic efficiency of aquifer recharge and water recycling

3. DIEES PhD Candidate Seminar Series Yiannis Kountouris, 24/3/20093 Values and the Relation to Population Segments TEV= Use Value + Non-Use Value TEV= Direct Use Value + Indirect Use Value + Existence Value+ Bequest Value+ Aesthetic Value +… (Pearce, 1993) Specific values of an environmental resources/goods are estimated based on a random sample of the overall population (Adamowicz, Boxall, Williams and Louviere, AJAE 1998) Different people understand the same things in different ways and can gain different values from the same environmental good Capturing is TEV can be complicated because: –of the multitude of values –a single experimental instrument may not be able to capture different values across different segments of the population due to limitations of the experimental design In this paper: –Discriminate among the values derived from the environmental good –Apply 2 distinct choice experiments aimed to capture different sets of values –Aggregate the benefits across the relevant populations

4. DIEES PhD Candidate Seminar Series Yiannis Kountouris, 24/3/20094 Methodology – Choice Experiment Non-Market Experimental Valuation to circumvent the absence of markets and market prices –Creates a hypothetical market in which individuals are called to participate Stated preference method –Survey based data collection In environmental economics: –Boxall, Adamowicz and Swait (EcolEcon, 1996); Hanley, Wright and Adamowicz (ERE, 1998); DeShazo and Fermo (JEEM, 2002), Bosworth, Cameron and DeShazo (JEEM, 2008); Ladenburg and Olsen (JEEM, 2008) In water resources –Hensher, Shore and Train (ERE, 2005); Birol, Karousakis and Koundouri (EcolEcon, 2006), Viscusi, Huber and Bell (ERE, 2008)

5. DIEES PhD Candidate Seminar Series Yiannis Kountouris, 24/3/20095 Methodology – Choice Experiment Based on: –Lancaster’s (1966) characteristics theory of value: Demand is defined over the characteristics/attributes defining a good and not on the good itself –Random utility theory: How individuals make choices over discrete alternatives Survey Design : –The good to be valued is defined in terms of its constituent attributes and their levels –If one of the attributes is monetary, then the marginal WTP for each attribute can be extracted –Profiles are constructed from the attributes and their levels –Respondents are called to make a series of choices between different profiles and an opt-out alternative –Data are analyzed using the Multinomial Logit Model or its variants

6. DIEES PhD Candidate Seminar Series Yiannis Kountouris, 24/3/20096 Methodology – Choice Experiment The utility of an individual i from a profile j is given by: Where is the systematic component of utility assumed to be a linear function of the alternative’s characteristics and ε ij is the random component of utility A profile j is chosen over an profile q if (1) (2) (3)

7. DIEES PhD Candidate Seminar Series Yiannis Kountouris, 24/3/20097 Methodology – Choice Experiment The probability of an individual i selecting an alternative j is given by Willingness to Pay for an attribute is calculated as (Hanemann, AJAE 1984) The consumer surplus from moving from state 0 to state 1 is calculated as (4) (5) (6)

8. DIEES PhD Candidate Seminar Series Yiannis Kountouris, 24/3/20098 Case Study Particulars Location: Akrotiri Aquifer –Southernmost part of Cyprus Major source of irrigation water for local farmers Provides significant ecological benefits –Sustains the Akrotiri wetland which has been found to harbor significant nonuse values (Birol, Koundouri and Kountouris, JEPM 2008) Severely depleted aquifer, mined to 15% of its capacity Sea-water intrusion to maintain the hydrological balance –Renders groundwater useless.

9. DIEES PhD Candidate Seminar Series Yiannis Kountouris, 24/3/20099 Case Study Particulars Aquifer Recharge with tertiary treated wastewater –Benefits: Prevention of seawater intrusion to the aquifer – maintenance of water quality in terms of salinity –Water security for farmers –Sustain irrigated agriculture Conservation of the current environmental conditions –Prevention of desertification –Objections Domestic use will be barred Not all crops can be irrigated –Response to objections In case of no recharge neither irrigation, nor domestic use will be possible due to increased salinity

10. DIEES PhD Candidate Seminar Series Yiannis Kountouris, 24/3/200910 Identification of Stakeholders Methods: –Discussions with scientists, policy makers and the local public –Focus groups with members of the public, farmers and experts Two major stakeholders: –Farmers –Residents

11. DIEES PhD Candidate Seminar Series Yiannis Kountouris, 24/3/200911 Stakeholders Stakeholder groups draw different benefits from the same environmental services Different motivations behind the values derived from each stakeholder group Farmers value the aquifer for its contribution to their business ventures –Primarily direct use values Residents value the aquifer for the maintenance of environmental conditions –Primarily indirect use values and non-use values Focusing exclusively in either one of the two stakeholder groups will not capture the full economic benefit from the recharge and the contribution to social welfare will be underestimated Solution: a distinct choice experiment is implemented for each stakeholder group and the valuations are aggregated across the respective populations

12. DIEES PhD Candidate Seminar Series Yiannis Kountouris, 24/3/200912 Experimental Design - General The good to be valued: Aquifer recharge with treated wastewater The attributes at various levels are combined to construct different profiles of the environmental good Subjects are called to make a sequence of choices between a number of alternative profiles

13. DIEES PhD Candidate Seminar Series Yiannis Kountouris, 24/3/200913 Experimental Design - Farmers Attributes: –Water quality –Water quantity –Employment in agriculture –Price per m3 of water Orthogonal “main-effects only” experimental design (Louviere Hensher and Swait, 2000; Hensher, Rose and Greene, 2005) Design blocked in two versions 8 choice sets composed of 2 aquifer management scenarios and a status quo option (Rolfe and Bennet, EcolEcon 2009)

14. DIEES PhD Candidate Seminar Series Yiannis Kountouris, 24/3/200914 Experimental Design - Residents Attributes: –Environmental conditions –Water quality –Employment in agriculture –Price per m 3 of water Orthogonal “main-effects only” experimental design Design Blocked in two versions 8 choice sets composed of 2 aquifer management scenarios and a status quo option

15. DIEES PhD Candidate Seminar Series Yiannis Kountouris, 24/3/200915 Attributes definition - Farmers Water quality: –Current level: Water quality is at a medium level. Current levels of salinity allow the cultivation of all potential crops. Recharge will maintain water quality in terms of salinity –Low level: Water salinity will increase in the medium run to a level that will make the cultivation of most crops infeasible and will damage soils beyond repair. Farmers will have to alter their cropping patterns which will entail capital costs and additional investments or abandon farming altogether. Water quantity: –Current level: Water supply for irrigation is sufficient for farmers needs. Recharge will maintain the current level and pumping cost will remain at current levels –Low level: Water supply will decrease limiting water availability for irrigation by 25- 50%. Pumping costs will increase by 50%-100% Employment in agriculture –Employment in agriculture will decrease in the near future. If no intervention is implemented employment will decrease by 20% to 1200 farmers. With intervention employment will decrease to 1455, 1380 or 1275 farmers. Water price –The price of water per m 3 pumped for irrigation. The can remain at its current level or increase by 50%, 25% or 10%

16. DIEES PhD Candidate Seminar Series Yiannis Kountouris, 24/3/200916 An example of a choice set

17. DIEES PhD Candidate Seminar Series Yiannis Kountouris, 24/3/200917 Attributes definition - Residents Ecological Conditions: –Current level: Current landscape will be maintained. No desertification. Existing natural wetlands will be maintained and continue to sustain current biodiversity –Low level: Desertification of 20% of the overlying area. Existing wetlands will be drained resulting to biodiversity loss Water quality: –Current level: Water quality is at a medium level. Current water quality allows watering gardens and public lands as well as agricultural lands. Under the recharge water will not be used for domestic purposes –Low level: Low water quality will be inappropriate for the production of domestic crops. Employment in agriculture –Employment in agriculture will decrease in the near future. If no intervention is implemented employment will decrease by 20% to 1200 farmers. With intervention employment will decrease to 1455, 1380 or 1275 farmers. Water price –The price of water per m 3 of domestic water. The can remain at its current level or increase by 50%, 25% or 10%

18. DIEES PhD Candidate Seminar Series Yiannis Kountouris, 24/3/200918 Treatments for Potential Biases Hypothetical bias (Carlsson and Martinsson, JEEM 2001; List, AER 2001; Cummings and Taylor, AER 1999) –Cheap talk: remind of other financial obligations and budget constraints explain hypothetical bias and ask respondents to answer truthfully Starting point bias and anchoring –Randomized sequence of choice sets across respondents Trained personnel used for data collection

19. DIEES PhD Candidate Seminar Series Yiannis Kountouris, 24/3/200919 Experimental application Data collected: –Choice –Environmental attitudes –Socioeconomics Samples: –150 randomly selected farmers (out of a population of approximately 1500) 8 protestors identified and excluded –300 randomly selected non-farming residents (out of a population of approximately 170,000) 14 protestors identified and excluded Data collection method –Face to face interviews after a scheduled appointment Data collection: March-April 2008

20. DIEES PhD Candidate Seminar Series Yiannis Kountouris, 24/3/200920 Variable Coding Water quantity, water quality and environmental conditions are dummy coded Employment in agriculture enters as a continuous variable Price enters as a continuous variable

21. DIEES PhD Candidate Seminar Series Yiannis Kountouris, 24/3/200921 Multinomial Logit Models Results *** significance at 1%, ** significance at 5%, * significance at 10% Positive/Negative coefficients: respondents are more/less likely to select an alternative with higher level of the attribute Farmers are more concerned about water quantity over water quality Residents are more concerned about water quality over environmental conditions Negative coefficients on price indicate aversion towards higher prices

22. DIEES PhD Candidate Seminar Series Yiannis Kountouris, 24/3/200922 Willingness to Pay Estimates Farmers WTP quantity >WTP quality Residents WTP quality >WTP Envoronmental conditions Values in CYP per m 3 of water

23. DIEES PhD Candidate Seminar Series Yiannis Kountouris, 24/3/200923 Cost Benefit Analysis Assumptions Recharge will be 6,000,000m 3 per year Direct use values accrued by farmers Indirect use values, non-use values accrued by residents Fixed cost of infrastructure development: CYP100,000 Maintenance and other variable costs: CYP720,00 per annum Costs are assumed to be constant over the time horizon Once recharged the aquifer cannot return to the previous state Implementation of the recharge implies that current employment, ecological conditions, water quantity and water quality will can be maintained for 200 years

24. DIEES PhD Candidate Seminar Series Yiannis Kountouris, 24/3/200924 Aggregation of Benefits The total economic value is defined as: TEV=Values derived by farmers + Values derived by residents TEV=CS F *W F +CS R *W R CS F and CS R :the farmer’s and resident’s consumer surpluses per m3 of water respectively W F and W R :the yearly consumptions of water for farmers and residents respectively Benefits are assumed to be constant over the time period

25. DIEES PhD Candidate Seminar Series Yiannis Kountouris, 24/3/200925 Discounting Aquifer recharge has long run effects –Sustainability of irrigated agriculture –Continuing recharge guarantees the hydrological balance for 2 centuries Exponential discounting places less weights on future costs and benefits relative to future Declining discounting: –Experimental evidence (Viscusi, Huber and Bell, JRU 2008) –Uncertainty over future growth (Gollier, JET 2002) –Intergenerational equity arguments

26. DIEES PhD Candidate Seminar Series Yiannis Kountouris, 24/3/200926 Discounting Discounting profile adapted from Gollier, Koundouri and Pantelides (Economic Policy, 2008) Estimated using historical data on the real interest rate –Country specific declining discount rates are estimated for 9 countries –A global discount rate calculated as a weighted average of the 9 country specific rates –Weight is the ratio of a country’s GDP over the aggregate GDP

27. DIEES PhD Candidate Seminar Series Yiannis Kountouris, 24/3/200927 Discounting

28. DIEES PhD Candidate Seminar Series Yiannis Kountouris, 24/3/200928 Cost Benefit Analysis Results

29. DIEES PhD Candidate Seminar Series Yiannis Kountouris, 24/3/200929 Cost Benefit Analysis Results Under the DDR the average NPV is –1.28 times the NPV under the 4% constant discount rate –1.6 times the NPV under the 5% constant discount rate –1.9 times the NPV under the 6% constant discount rate Values in CYP

30. DIEES PhD Candidate Seminar Series Yiannis Kountouris, 24/3/200930 Conclusions A single survey instrument cannot capture the entirety of economic values involved in aquifer recharge –Risk of underestimating TEV Separate surveys should be implemented on each segment of the population to extract all relevant values Discounting assumptions do not affect the outcome of the CBA Both farmers and residents gain significant benefits from aquifer recharge The recharge is economically viable and efficient

31. DIEES PhD Candidate Seminar Series Yiannis Kountouris, 24/3/200931 Thank You!!!